As home prices spiral downward, foreclosures increase, consumer confidence reaches an all-time low, recession looms around the corner, and a lackluster Wall Street limps along, the option of a government bailout is gaining momentum.
In fact, the new Economic Stimulus Act that went into effect as of March 6, 2008, allows for the Federal Housing Administration (FHA) to come to the aid of homeowners to refinance their homes at lower interest rates to avoid default and foreclosure if they have adjustable rate mortgages, even if they were in default with their current home loan, through a program know as FHA Secure. The FHA has even gone one step further and allowed the FHA loan limits to be temporarily increased in order to stimulate and stabilize the U.S. housing market. Before this act, the FHA loan maximum limit was $362,790 and now those limits have been increased to anywhere between $271,050 and $729,750, depending on the geographic location of the home to be purchased. This loan limit increase will allow the FHA to offer loans and refinancing options for approximately 240,000 more homeowners and potential buyers who want to purchase their home with an FHA guaranteed loan. It will help existing homeowners refinance their current loans up to 125 percent of the value of their home in order to include closing costs and fees in their loan so they can refinance down to an affordable interest rate. It also assists homeowners in areas where their home value has dropped and they may owe more on their home than it is currently worth. The act is a short-term measure, and the FHA has approval to fund these higher limits until December 31, 2008, unless it is extended.
Additionally, last month both chambers of Congress were finalizing a bill that would expand the reach of the Federal Housing Administration (FHA) even greater. The bill's sponsors, Senate Banking Committee Chairman Christopher Dodd, D-Conn., and House Financial Services Chairman Barney Frank, D-Mass., call for the FHA to provide an additional $300 billion in guarantees to refinance risky sub-prime loans into more affordable terms. Participating lenders or mortgage holders would reduce principal in exchange for a payment from the proceeds of a new FHA loan. The plan could help one million to two million borrowers, according to a draft of the bill. The proposal also includes $10 billion in loans and grants for states to buy and rehabilitate foreclosed homes. Both plans would be voluntary for the industry, according to the lawmakers. The incentives for companies to participate include the possibility of avoiding the greater costs associated with foreclosures.
Legislation used as a tool to tackle the current housing crisis is not new. As a result of the Great Depression, in 1934, Congress created the Federal Housing Administration (FHA) to help Americans with poor credit by homes. The FHA became a part of the Department of Housing and Urban Development's (HUD) Office of Housing in 1965.
When the FHA was created, the housing market was unresponsive. As stated by USA.gov two million construction workers had lost their jobs, mortgage terms were difficult for homebuyers, mortgage loan terms were limited to 50 percent of the property's market value with a repayment schedule spread over three to five years and ending with a balloon payment, and America was primarily a nation of renters. Only four in ten households owned homes. Throughout the l940s, FHA programs helped finance military housing and homes for returning veterans. In the 1950s, 1960s, and 1970s, the FHA helped to generate millions of units of privately owned apartments for the elderly and handicapped. Its primary function was to steady falling home prices and make it possible for potential homebuyers to get the financing they needed when recession prompted private lenders to pull out of mortgage markets in the 1980s. By 2001, the nation's homeownership rate had jumped to an all-time high of 68.1 percent.
The FHA provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. It insures mortgages on single-family and multifamily homes, including manufactured homes and hospitals. HUD reports, that it is the largest insurer of mortgages in the world, insuring over 34 million home mortgages and 47,205 multifamily projects since 1934. It states that the FHA currently has 4.8 million insured single-family mortgages and 13,000 insured multifamily projects in its portfolio.
It is the only government agency that operates entirely from its self-generated income, similar to the LFUCG Sanitary Sewer fund. The proceeds from the required mortgage insurance paid by the homeowners are annexed into a dedicated account that is used entirely to operate the program. FHA mortgage insurance provides lenders with the protection against losses as the result of homeowners' default on their mortgage loans. The cost of the insurance is passed along to the prospective homebuyer and is typically included in the monthly payment. Like most conventional loans, the cost to the homeowner will drop off when the remaining balance is 78-80 percent of loan value, or approximately five years. The lenders bear less risk because the FHA will pay a claim to the lender in the event of a homeowner's default. If the lender does have to foreclose, the FHA will pay the lender the unpaid principal on the loan, forgone interest, and a portion of the foreclosure costs. FHA loans typically have better rates than other sub-prime mortgages and don't carry any prepayment penalties.
The late 1990s and early 2000s caused the FHA loan with its strict guidelines and loan limits to fade and get pushed aside by the easier-to-obtain sub-prime loans. Sub-prime loans offered no-money-down options, higher debt to income ratios, and less stringent appraisals. FHA loans slipped to just 4 percent in 2006, compared to 18 percent in 1990, as maintained by the Mortgage Foundation.
According to FHA.com, FHA loans still allow the individual to receive financing up to 97 percent. Since most FHA mortgages are 30-year fixed rates, the lender won't make the loan unless he has proof the borrower will be able to make the monthly payments, which was not the case with sub-prime loans. Requirements have been eased, but it is important to note that the FHA's list of items that still must be repaired include such items as leaking or worn out roofs, excessive foundation settlement, faulty electrical or plumbing systems, and hazardous materials on the property.
In more than 70 years since the FHA was created, much has changed, but arguably Americans are still the best housed people in the world.
Jennifer Mossotti, CCIM, is a licensed Realtor with Prudential de Movellan Real Estate and former LFUCG councilmember.